Dr Christie Viljoen | Senior Economist | PwC South Africa | mail me |
We are pleased to share our fifth South Africa Economic Outlook report for 2023. This edition focuses on the need for companies to report non-financial data in order to help measure socio-economic progress better than is currently being done by the calculation of gross domestic product (GDP).
GDP measurement of economic activity is a prominent macroeconomic statistic and is based on industry-level data which, in turn, originates from production and other data sourced directly from South African companies.
GDP has many real-world applications. For example, the National Treasury uses nominal GDP growth forecasts to project tax revenues. The widespread usage of GDP also enables it to be utilised as a way to explain the magnitude of other issues.
Dependent on nature
In our recent publication ‘Managing nature risks: From understanding to action’ about business reliance on nature to supply much-needed goods and services, we calculated that 55% of global GDP is moderately or highly dependent on nature.
However, GDP faces many shortcomings, with detractors saying it is outdated for modern societal needs in measuring prosperity and progress.
The criticism against GDP includes that the measurement:
- Does not account for income distribution and inequality
- Ignores environmental and social costs
- Does not reflect quality of life
- Excludes the impact of externalities like the costs of pollution
- Cannot measure the value of unpaid work
- Omits the depletion of natural resources
- Is unable to measure the impact of social and cultural factors
Alternatives to GDP include the Human Development Index (HDI), Sustainable Development Goals (SDGs), Genuine Progress Indicator (GPI), Social Progress Index (SPI), and Happy Planet Index (HPI), amongst others. However, while alternative measurements of socio-economic progress are available, these have key shortcomings as well.
One of the key reasons why GDP is such an enduring feature of economic analysis is the frequency at which it is measured. While mostly released on a quarterly basis, the component parts of GDP calculations are frequently available on at least a monthly basis. This enables frequent updates to data that directly reflects the situation in the economy. This is also a big challenge to alternative measurements of economic prosperity: many good alternatives exist but are often only published on an annual basis, and frequently with time lags.
The majority of data used to compile GDP data is derived from company-level information. This places company reporting at the centre of GDP calculations and, inter alia, the calculation of some alternatives to GDP. Businesses reporting in support of GDP alternatives need to speak the same language.
The use of non-financial performance indicators
We’ve learned from companies across all industries that identifying the sources of this data is often one of the primary challenges.
In many cases, the data comes from multiple sources and/or is manually derived, susceptible to human error, and the origin of the data may be unknown, which makes it challenging to identify and trace the data from initial source to final report.
Environmental, social and governance (ESG) data refers to a set of non-financial performance indicators that can be used to better understand business sustainability and, by implication, societal sustainability and socio-economic progress.
These indicators typically include information on a company’s environmental impact (such as greenhouse gas emissions, water usage, and waste management), social impact (such as labour practices, human rights, and community involvement), and governance practices (including board composition, executive compensation, and anti-corruption measures). The exact set of variables will depend on the nature of the organisation.
“Expectations around the reporting of non-financial data are evolving rapidly and becoming increasingly important to investors, shareholders, regulators and other stakeholders. Not surprisingly, for most organisations, sustainability is rising to the top of the agenda. Embedding ESG factors into an organisation’s culture — in thinking and ways of operating — is key to ensuring organisations can be successful and sustainable, now and in the future. It is also essential in getting the right systems in place to make reporting of non-financial data a priority.”
– Lullu Krugel, PwC South Africa Chief Economist
In June 2022, the Johannesburg Stock Exchange (JSE) published a guidance document on sustainability reporting. The local guidance indicates that the selection of non-financial data identified for reporting must be guided by materiality: information is material if omitting, misstating, or obscuring that information could reasonably be expected to influence decisions that the report user makes about the specific reporting organisation, based on that reported information.
The JSE is also looking at the concept of double materiality: ESG factors that could affect 1) a company’s financial performance (outside in) and 2) how the company’s ESG response affects outside factors (inside out).
Key content in this report includes:
- Gross domestic product (GDP): The economist’s knight in (not so) shining armour.
- Alternatives to GDP: Measuring societal progress and prosperity beyond economic production.
- Non-financial company data: An effective reporting strategy starts with quality data sources.
- Environmental, social and governance (ESG) focus: An umbrella of sustainability-focussed data.
- Purpose-led growth: Moving from reporting compliance to societal value creation and measurement.
- How we can help with ESG data collection and reporting